Private Account Wealth Management Services
Newsletter Issued 11-08-05:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our previous newsletter, dated October 11th, forecasted that the DOW would have an expanded range, due to increased volatility, between 9,700 and 10,610. We further mentioned that there was formidable support for the DOW at 10,000 and anticipated a breach of this level. The actual result was a high level of forecasted volatility, with the DOW vexing with large single-day moves up as well as down — common characteristics of a market transitioning from a bullish ascension to a bearish decline. The DOW for the month actually produced a trading range between 10,156 and 10,608, narrower than forecasted, but with large daily market swings. The key support level of DOW 10,000 held, but should be breached in the months ahead, as the bear market decline is resumed.

The US dollar was anticipated to continue its advance, with a euro fx equivalent trading range between $1.175 and $1.22. This forecast proved to be partially accurate, with a narrower actual trading range, between euro fx equivalent of $1.1950 and $1.2249. The US dollar has been ignoring the ever-growing trade imbalance and current-account deficit, continuing its advance as a global currency safe haven.

The US treasuries were forecasted to have completed their retracement in price and peak in yield on October 7th, and would be resuming their primary trend for higher prices and lower yields during the month. Instead, the actual result was that the US treasuries slowly drifted lower in price, peaking at a yield of 4.65% for the US Treasury 10-year Note. The fear of growing inflation encouraged the decline, even though the core level of inflation, excluding food and energy, remains very well contained.

Looking forward . . .

The pundits who are cheering the solid gains in consumer spending data, released on October 31st, are missing the point. The “strength” reflected higher food and energy prices, and not some urge to spend. Indeed, food and energy outlays have accounted for 41% of the growth in spending over the past year; however, that is a threshold reached only three times in the post-war period — 1974, 1980 and 1990, which were not exactly happy times.

The picture looks even more dramatic on a short-term basis. Nearly 90% of the growth in consumer spending over the last quarter has come from food and energy. So, it would seem that rather than celebrating the “strength” in consumption, we should be fretting the fact that food and energy are now crowding out discretionary spending to a degree that has always been associated with a recession.

The October employment report, released last Friday, was below expectations. Non-farm payrolls increases by a scant 56,000, where as the Street consensus was between 100,000 and 120,000. Most of the gain came from construction, which would be affected if and when the housing boom falters in the near future. The diffusion indexes, which measure the share of industries adding jobs, were poor. The meager gains in employment were thinly spread around, leading us to a further conclusion that the jobs added were unimpressive. The sole bright spot was a solid rise in average hourly earnings, to 0.5% from 0.1% in September. However, it is premature to get to excited over the rise, since the average of the previous six months’ increase was only 0.2%.

New Federal Reserve Chairman, Ben Bernanke:

Most pundits do not expect any abrupt change in the Federal Reserve policy-making when Ben Bernanke transitions to become Alan Greeenspan’s successor.

There are two critical elements about Bernanke that distinguish him from Greenspan:

1. His academic expertise includes studies of the Great Depression era in the United States and also of the deflationary period in recent Japanese’s history. We therefore believe that Bernanke will not push the Fed’s policy envelope close to the edge of deflation. He recognizes the risk and understands the difficulty of making monetary policy when the interest rate approaches zero and when the price level is falling. His bias, if there is any, will favor a slight easing during periods when inflation is very low and interest rates are low as well. Therefore, the Bernanke real interest rate target is probably a little lower than the Greenspan equivalent.

2. We believe that Bernanke will accept some form of numerical target or rule, where as Greenspan would absolutely oppose it.

In conclusion, Bernanke is open to targeting or a numerical rule. He believes that a target with a medium-term time horizon could add to stability within the financial markets. He will in all likelihood lead the Federal Reserve into a dialogue about targeting. It will remain to be seen how open it will be and how public.

US Economic Slowdown Due to Housing Sector:

The US economy can be affected with either a bursting US housing market bubble or not. Even a mere slowdown in the sector could directly lead to an employment loss of about 1% or the equivalent of approximately 1.2 million jobs. In overheated California alone, the job loss could total as much as 2%, and this is just housing-related employment.

Housing related employment in such areas as construction and real estate services now stands at a record 5.1% of the US workforce, compared to 4.3% in 1990. The 1.2 million figure assumes housing employment returns to its 1990 intermediate bottom. In California, one of the states with the greatest exposure, housing employment has risen to 6.2% from 5.3% in 1990.

This estimate probably understates the total impact of a downturn, because they do not include related areas such as banking and furniture, nor the indirect impact from weaker spending.

The impact would be substantial, with a deceleration from 10% growth in housing prices to zero. Residential investment now accounts for 6% of the growth in Gross Domestic Product (GDP), the highest it has been in nearly 50 years, which compares to a long-term average of 4.6%. We estimate that just reverting to the long-term average would shave 1.5 percentage points from GDP growth — from currently 3.8% to 2.3% — which is likely over several years.

We estimate that even in a flat home-price environment, another 1.5 to 2 percentage points of GDP growth would be lost over several years, from a housing wealth affect standpoint.

The total impact of both reverting to the long-term average residential investment percentage of GDP and a flat home-price environment could collectively reduce GDP annual growth to between 0.3% to 0.8%.

Long-term conclusions and current month expectations . . .

Equities might be benefiting from the Bernanke choice after the announcement partly because it is assumed that the famed “Greenspan put” will be rolled into the “Bernanke put.” The “Greenspan put” is a safety net based on the assumption that Federal Reserve Chairman Alan Greenspan stands ready to respond to any force that would ultimately threaten the welfare of the stock market.

The financial markets will have to contend with a few uncertainties:

Policy Statements: Greenpsan writes the current ones; how will Bernanke explain his views?

Flexibility: A hallmark of the Greenspan Federal Reserve has been his flexibility. Bernanke, for his part, appears to have similar characteristics, save for his preference toward targeting, which is arguably a very rigid system.

Academics versus Real World: Greenspan would often toss out the textbook when it seemed needed. Can Bernanke be that flexible and open minded? Greenspan has often been seen as knowing the right thing to do at the right time, and only time will tell whether Bernanke has this ability.

The DOW continues to remain within a large trading range, with vexing daily price moves, confirming our beliefs that all of the other major stock indices are in the process of topping — peaking in price. We expect the volatility to remain high and are forecasting a DOW trading range for the month between 10,000 and 10,600. The bear market decline will be confirmed with a decisive breach of the key support level at DOW 10,000, which could happen this month, but in all likelihood, may be delayed to next month. We are entering the Holiday spending season, which will test consumers all ready-tight budgets and their level of expenditures as compared to previous years. A fundamental catalyst for resumption in the stock market decline may be represented by reduced consumer spending during the upcoming Holiday season, as food and energy prices crimp their ability to spend.

The US treasuries, with the rising US dollar and increasing open-interest demand, should rise in price and decline in yield during the month. It appears that the US treasury 10-year note has peaked at a yield of 4.65%, and we expect it to be well received, along with the 3-year and 5-year notes, in the upcoming quarterly refunding auction being held this week. Inflation pressures, excluding food and energy, remain low and we feel the future concerns will shift in the coming months from inflation to deflation, or at least stagflation.

The US dollar is anticipated to remain within an ascending trading range, between euro fx equivalend of $1.16 and $1.21. The growing US trade imbalance and current-account deficit may be a fundamental reason for resumption in a strong US dollar decline; however, if we enter a period of a global economic slowdown, it could become the desired currency of choice. Foreign countries, which currently own over 45% of the available US treasuries, continue to purchase them because of the supported and rising US dollar — financing the US ever-growing deficit. Our technical wave pattern analysis still expects an ascending trading range, but could change in the coming months, as the US dollar rally becomes overextended.


1. A 75% to 85% allocation of their taxable ordinary funds and/or tax-deferred funds into a conservative as well as flexible investment strategy using various no-load index mutual funds and exchange traded funds (ETF’s) offered through our Private Account Wealth Management Services. The minimum investment criteria are determined after reviewing the investor’s current assets and fund allocations. These services are ideal for individuals, trusts, foundations and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an active management service to generate a positive rate of return between 12% to 35% per year (after fees) through either a rising or declining stock, bond or real estate market.

2. A 15% to 25% allocation toward cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.

If there are any questions regarding the information discussed within this newsletter, the investment allocations mentioned above or our unique management service, please call the number provided below or e-mail us and we would be happy to provide further clarification.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400

Acknowledgements: Federal Data, Jan Hatzuis, Economist, Cumberland Advisors, Miller Tabak & Comapny, Liscio Report.

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